Alexei Agratchev is the cofounder and CEO at RetailNext which enables retailers and manufacturers to collect, analyze, and visualize data about in-store customer engagement. Alexei Agratchev has raised for the company to date $200 million from investors such as Qualcomm Ventures, August Capital, American Express Ventures, or NGP Capital.
In this episode you will learn:
- Getting the right mentors
- Learning about gaps in the market while being in corporate
- Choosing the right cofounders
- Expectations on Saas models
- The future of retail
- Difference between strategic investors and VCs
- Finding the alignment with investors
- Reporting strategies with employees
- Acquiring a customer offline vs online
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About Alexei Agratchev:
Alexei Agratchev is the CEO and Co-founder of RetailNext and he serves on its Board of Directors.
Before founding RetailNext in , the world’s first technology company dedicated to providing advanced in-store analytics for brick-and-mortar retail businesses, Alexei Agratchev spent eight years at Cisco Systems. During his tenure at Cisco, Alexei Agratchev held a number of leadership positions with direct responsibility for developing and launching new product lines. He was the Founder and General Manager of an internal startup within the Cisco Systems Emerging Technologies Group focused on developing video applications for the gaming and retail markets.
Prior to Cisco Systems, Alexei Agratchev was a consultant at Accenture in its Electronics and High Tech Operating Unit. Alexei Agratchev was responsible for the design and implementation of enterprise solutions that enhanced business performance for various corporations.
Recently named to the Silicon Valley Business Journal’s 40 Under 40 list, Alexei Agratchev holds a bachelor’s degree in International Relations from Claremont McKenna College, where he graduated Magna Cum Laude. Alexei Agratchev has also completed the Stanford Graduate School of Business Executive Program and the Cisco Leadership Series.
Connect with Alexei Agratchev:
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello, everyone, and welcome to the DealMakers show. I’m actually very excited again. Today we have a guest, again a foreigner just like myself and someone that has been behind the trenches for quite a bit. So, Alexei Agratchev from RetailNext. Welcome aboard today.
Alexei Agratchev: Thank you for having me. Very happy to be here.
Alejandro: You’re originally from Moscow, and you were living in the Soviet Union when things were falling apart. How was the experience of growing up there for you?
Alexei Agratchev: Yeah, I was born in Moscow, and I grew up towards the end of the Soviet Union. I would say in my first couple of grades in school, first and second grade, it was very much still a Soviet-style education. In fact, I got kicked out of my first-grade class because apparently, I mispronounced some words and some communist poems, and I got kicked out for having anti-communist tendencies. So, that teacher was still very hardcore, and my parents had to find me another class. Then things definitely started to open up. I would say the things were very different from looking at my kids now growing up in the U.S. or even people in Russia now. I came from a highly educated family. My dad is very well educated. He is a linguist and an interpreter. My uncle is a mathematician. My grandmother was a fairly well-known chemist. In retrospect, everybody lived very, very poorly even though people were highly accomplished and educated. As a result of that, if I look at me and my friends outside of sports, we had very little ambition. You didn’t have any real role models you saw around that you wanted to look up to that were more successful, that had money, that did all these different things. I would say sports and athletics was the only thing that motivated us in those years.
Alejandro: Got it. What was the trigger for you to come to the U.S. for boarding school?
Alexei Agratchev: It was a bit random. The main thing is at that time, even having an opportunity to travel and get exposure to western films and other things were very, very popular which was something all of us did want. I wanted to learn English. I told my parents that I would love to learn English. My dad was an interpreter, and he was in the U.S. with the delegation of Soviet scientists as an interpreter. He was able to get a couple of applications for boarding schools. He helped me fill them out because I didn’t speak the language at the time. Because I was the only kid from the Soviet Union that applied, it wasn’t a very well thought-through plan because I was the only kid that applied. I got a full scholarship and an opportunity to come over.
Alejandro: Really cool. You actually had a family that was overseeing you and watching you while you were in the U.S. Who was this family?
Alexei Agratchev: What happened, I was 14 years old when I first came, and I came by myself. I lived in boarding school. Move-in boarders are taken care of, but you do need to have a legal guardian of sorts, somebody who takes you if you’re under-aged and takes responsibility for you in the country. Initially, it was a family in New England that volunteered to do that, and they became my legal guardians. After the first quarter or so when they got my grade report because I didn’t really speak the language my grades were pretty much failing. After they got that, they thought that I was too stupid to be there as someone to take care of. So, they said they didn’t want to be my legal guardians anymore. At that time, a guy named Michael Eisner who was the Chairman and CEO of Disney was in Russia for a brief trip to look at some opportunities, and they assigned my dad to interpret for him, and they got along. My dad mentioned to him that he had a son in school. He wanted to meet me. Then he actually volunteered to be my legal guardian. So, he became my legal guardian for the rest of my time in middle school. I’d spend my evenings with them. It was an interesting experience, in general, because I had never been outside of the Soviet Union at that time. I had never had exposure to certain people. Then you come to this boarding school where—if you look at those boarding schools, it’s actually a big culture shock for a lot of Americans, and certainly for me. You have .001% of the wealthiest families in the world that send their kids there. I ended up with a legal guardian who was a Chairman and CEO of one of the largest, most successful companies in the U.S. It was a lot of exposure to things that I had never experienced before.
Alejandro: Wow. Definitely incredible to be there with the Chairman and the CEO of Disney. What did you learn from such an accomplished leader for yourself?
Alexei Agratchev: Again, it wasn’t just him. I think if you look in general, as I did learn the language, about six months into my first year, I was able to communicate and start making friends, and because I was a foreigner, people started inviting me for the weekends in their homes, and some holidays and Thanksgivings I went with Michael and his family. There were a number of people that I had been exposed to that I would say were extremely successful, ran big companies. To me, I think the one quality that I remember with a lot of people just was this phenomenal curiosity where I was a 14, 15, 16 year-old-kid depending on the year, and you have these people that are unbelievably successful beyond anything I had seen before that are just unbelievably curious about my life and what it was like growing up in Russia and the different things. They were asking so many questions, and they were so curious, I’ve never really experienced that before. I would say that was the most consistent quality of fine people. They seemed genuinely interested, and they felt like they could learn a lot from a random young kid just because I came from a different place.
Alejandro: Got it. And listening is definitely one of the qualities that I always see in great leaders. Just out of curiosity, did he at least take you to Disney Land?
Alexei Agratchev: You know, I had a lot of ability to go to Disney Land. My whole family would spend a weekend at Disney World. I went to college in southern California, so both Disney Land as well as I was able to. Eventually, my dad for a few years worked for Disney as well. I also had a chance to—I grew up playing hockey and was a big hockey fan. When Disney launched Anaheim Mighty Ducks [inaudible 00:07:11], they launched and they owned the team for a while. I would go to games. I got to know all the players. I actually helped some of the Russian players that they drafted. These are slightly older than I was. I was 14. Call 18, 19, these kids, but some of them had never been outside of Russia. Didn’t speak a word of English, and all the sudden they found themselves in Orange County playing for an NHL team, and they had to learn the language. Now, they actually went from having no money to being quite wealthy, but not knowing anything about the system, so I actually got to know a lot of them. I was helping them out with English and language and other things because I went through that a few years before which was fun.
Alejandro: What an amazing experience. Then you go to college, and then after that, you become a consultant for Accenture. What made you go there?
Alexei Agratchev: I did not know what I wanted to do all the way up until I was graduating and honestly after I graduated. College was the first time I really started liking academics, and I started enjoying learning. Before that, it was more about sports and athletics for me. I knew I wanted to do something. Until almost the very end, I thought I was going to go back to Russia after college. Then I started applying to jobs. The college I went to at the time, I graduated in 1999, the #1 job for my school was Investment Banking. That’s what everybody wanted to do. I think an analyst job at kind of an entry level associate job at Goldman Sachs was the #1 job that a lot of people went into from that school. I went to Claremont McKenna very focused on finance and economics. A lot of people went into finance. A lot of very successful alums in finances and private equity. Initially, I started going down that route, and then all my friends from a year ahead of me that went into investment banking just hated the job. I think it was amazing training. Especially at that time, the job was ridiculous hours doing a lot of mind-numbing work. While it does train your attention to detail and especially skills. At that time, like “I don’t think that’s what I want to do.” Because I didn’t know what I wanted to do, consulting seemed like a great opportunity to continue learning while making some money. Financially, I wasn’t in the position to go to graduate school, and I didn’t think I wanted to do it. So, I applied to Accenture, at that time management consulting. I think it was a phenomenal way—well, I don’t see myself as a career consultant, and I figured that out pretty quickly. It was a phenomenal way to start your career. I think both the training you get, the kind of people you get exposed to, and frankly, I had an opportunity to jump into a company at a level I wouldn’t be able to do it without that because you get exposure. It was really delaying my decision-making because I didn’t know what I wanted to do.
Alejandro: That was Cisco, right? That was where you eventually went to.
Alexei Agratchev: Yeah. Cisco was my last client at Accenture. That was at the time. Today, Cisco is, obviously, big, very successful, a highly profitable company, but I guess most of it was a bit of a legacy, old-school company. At that time, it was the hottest company out there. So, in ’99, 2000, the stock was doubling every six months. Cisco was on the covers of all these magazines. That was the place to work. I was put on the project there as a consultant, helping to actually build a—it was mostly a hardware company. They made all their money from hardware; had a lot of software, but didn’t have a real software business. They wanted to transition from being a pure hardware company to being more of having a real software business. They looked at IBM which went through a similar transition as a case study, and they hired Accenture as a consulting to help them with the strategy. That’s the project that I was working on, and then I was working very close to the guy running product management for a lot of the software and a lot of the other leadership in this emerging software group at Cisco.
Alejandro: Really cool. I believe I’ve seen that you were something like 25 years old and managing like 80 engineers that were reporting to you. Is that right?
Alexei Agratchev: Yeah. I joined Cisco. I was there for about a year or so as a consultant, and then one of my main clients convinced me to join initially as a product manager, and we launched a new product. I definitely got a lot of opportunities. Very quickly, I got asked to manage a team. So, I became a manager, probably when I was, I think 22 maybe. I became a manager initially of a team. I was managing engineers. I’ve never been an engineer, but at that time, the guy running the business unit that was part of one or two formed this team—it was a co-joint venture engineering team where we partnered with smaller software companies, brought in their products, put in OEM joint venture agreements. They would assign some engineers who worked with part of my team. We would hire some engineer. We’d build Cisco stuff around it and then we’d sell it as an enhanced Cisco product. They wanted somebody who had technical knowledge, understood technology which at that point, I showed them that I could, but also, wasn’t an engineer that wanted to build everything in-house, who could leverage third parties. So, that’s why I was asked to manage that team. We built that team to a few products. It was actually very successful. Probably 15, 20 people working for me. But again, I was doing product management engineering and other things. Then there was a reorg, and somehow, they said, “You go manage this team now.” That team was about 80 people, half in San Jose and half in India that were just hardcore R&D Engineering team. I was 24 or 25 at most, maybe a little younger when that happened. So, I definitely got thrown into a management responsibility managing people much older than me and also managing teams doing stuff that I had never done before. So, I’ve never been an engineer. I could understand technology. I think my mind certainly worked that way, but I’ve never actually been an engineer.
Alejandro: Got it. Obviously, at this point, we’re talking about probably nine years of corporate America experience. What would you say got you thinking about “Maybe I should explore this entrepreneurship thing a bit more”?
Alexei Agratchev: Yes. Just to put it in perspective, when I joined Cisco, it was this rocket ship for the past 10+ years. Everybody who worked there had seen nothing but growth and prosperity. My first six months there, the stock went from, I think, 60/120 split and 1/80. Then it went all the way down to mid-single digits. All that happened before I invested a single share. But 2001 happened, dot-com bust things, and then Cisco went from 10+ years of nonstop growth to having to rationalize [inaudible 14:12]. We had to combine things; we had to find efficiencies. It was an interesting time too. Through all of that, I got a lot of opportunities. Also, I spent a while before I even began eventually working in Italy. I worked with customers around the world. I learned a lot, and it was, for me, I never thought about leaving because I was constantly learning and doing things. The team that I managed when I took over the engineers, it was a product that was used by a lot of the big Telcos, and initially, it had a lot of quality issues. We were able to fix it for a while. 1) It was an amazing management experience. To me, actually, going from first line manager to second line manager when you have managers working for you, in many ways it was a bigger learning and a hard adjustment in becoming a manager for the first time. Then it was also a bigger team, and it was a multi-national team, and you deal with all these customers. You deal with all the escalations, but then it got to a point where it became—I don’t want to say boring, but a fairly routine—it was a product that wasn’t going to see a lot of new innovation. It was fairly stable. We were working supporting it. For a couple of years, it was amazing. I really didn’t feel like I was learning that much. So, I started looking at potentially leaving. Then my boss at the time told me, “You know what?” A team of about 80 people. She said, “Take up to five people from all the committed budgets and see if you can find something new you can prototype and do as long as it’s relevant to Cisco. There were five people I really liked who were really good in my team. We said, “Let’s look at something interesting to do. At that time, Cisco acquired a company called [Siv Pics15:51], a small startup in San Diego that had this hardware for video surveillance for their casino market they had like Caesars Palace, Venetian, and a bunch of casinos deployed where they were using their hardware to digitize their old-school video. I got to know the founder of the company, and I said, “We can probably prototype a software application that could do some cool analytics around it and could help you use that data and video better.” We built a prototype because I had some resource we showed at a tradeshow. Customers got excited. This was for casinos. Then we got funding to do it as an internal startup as part of something called Emerging Technology Group, which is a fairly recent thing that Cisco created to enable internal startups within Cisco. The idea was to have a different model to be able to incubate these businesses, and hopefully, some of them will grow to build and plus businesses because at a scale of Cisco, building a 100-million-dollar business actually didn’t have much of an impact. So, for a good year and a half to two years give or take, we ran it as an internal startup, and it was where we were able to really do everything, and I had once in a while a conversation with the guy running the bigger group about budgets. But other than that, I did whatever we needed to do. Honestly, the funny thing is looking back at it, I look at the team, from an outside perspective, we had no real additional equity. We had no real upside like you do in a real startup. But for sure, we worked at least as hard and people were at least as motivated. If we were left alone, for all I know, we would have kept working like that until now. But then what happens at a company like Cisco while you experiment with these startups, it is very, very difficult for a big corporate company to truly leave teams like that alone. Cisco, especially, nobody at Cisco really had a true P&L responsibility below the CEO. It started getting to a point pretty quickly once you start reaching some scale where it stopped being managed as a startup, and you were forced to take a functional role while it had more of a general manager-type of an acting role, take a functional role. Either manage engineering or manage that. That’s at the time when I said, “You know what? I don’t think I want to do that now.” So, I left. Actually, the first six people as part of RetailNext, my current company, this was in 2007, all six of us were part of that internal startup. After that, I went out of my way not to find anymore Cisco people for a long time to get some diversity of thought and experience.
Alejandro: Got it. You guys all got aligned or your big highlight moment of “We need to put in the notice and make this happen on our own” was at a trip in the British Virgin Islands where you got your initial name. Is that right?
Alexei Agratchev: Well, yeah. It’s interesting. When I was thinking about leaving, I remember the guy, Pete Konkowski, who was the founder of the company I mentioned in San Diego. He had a house in St. John, which is the U.S. Virgin Islands, and he invited me there for a weekend with a few other guys. One of the guys was one of his customers from his previous company at Target. At that time, I knew I wanted to leave. We did all these very interesting things with computer vision and analytics for this casino, but we were literally on a boat. We went from St. John to the British Virgin Islands. If you’ve been there, you’re bar-hopping from island to island. We were sailing and talking to Pete and this guy who worked at Target about the kind of technologies that we built for casinos. These guys were like, “If you do something like that for retail and give this kind of visibility for people running stores, it would change the way we manage retail. I already decided I wanted to leave. I said, “Why don’t we do that.” Because we were in the British Virgin Islands, we wanted to name the company BVI. BVI.com was taken by Buena Vista International, so I think we named it BVI Networks, which in retrospect was a ridiculous name for the business, but we incorporated. That’s where the idea came together there on the boat. The other people that left with me, they weren’t there, but they also were all in the same place where that startup-feeling was over, so let’s go try to do something outside together. I knew they wanted to go do something, but they weren’t there in the BVI where all that concept got formulated.
Alejandro: Got it. Was the rebrand to RetailNext painful because normally, rebrands are quite a challenge.
Alexei Agratchev: What happened was the problem was while the company was called BVI Networks, when we were launching our initial product, we called the product RetailNext. In retrospect, having two different names for an early-stage startup, having two different names for a company and a product is really, really stupid. It’s hard enough to do any kind of marketing, get people to remember you when you’re a new company. We realized that fairly quickly. Then I was actually the only person that liked BVI Networks better. Everybody else liked RetailNext better, so we decided to rebrand the company as RetailNext. It is a pain. We were still reasonably small, so it’s a lot less of a pain than for a really big company, but it is a lot of work to rebrand something. It definitely was the right decision. The RetailNext is a name. When we first started the business, we actually thought we’d start with retail, and then we’ll maybe expand it to retail banking and hospitality and others. As we started learning what it would take to do this kind of analytics platform for retail, we learned that you have to be an extremely vertically-focused company. In fact, we talk about ourselves as an almost retail company first and technology company second. In that context, RetailNext even made more name in actually changing the company to RetailNext was a public commitment to that vertical focus which has been a very important part of who we are and how we build credibility with our customers.
Alejandro: So, what ended up being the business model for RetailNext?
Alexei Agratchev: If you look at the cost behind RetailNext was that our view of the world was that from a business perspective or from a problem-solving perspective was that brick-and-mortar stores were not going to go away. If you think about the 2007 and 2008 financial crisis, a lot of people in the Valley thought the brick-and-mortar stores were going to go away. Our view was physical retail was never going to go away, but at the same time, if you’re going to run physical retail stores, you cannot just compete on product and price alone on your merchandising. You’re going to have to compete based on experience. If you compete based on experience, you need tools to help measure and improve that experience. As a company, that’s what we did. We use the latest and greatest technologies to help retailers measure and improve and constantly optimize the experience inside their stores. So, we built the set of technologies over the years that can automatically tell you how many people walked past the store. How many of them walk in? A lot about those people: male, female, approximate age, new unique visitors, how much time they spend in the store, and just about everything they do in the store, everything the sales associates do in the store. Then build all these tools to use that data to constantly improve the way you run your stores and the way you service your customers. That was always the product. That was always the focus. Over 11 years now, what happened with technology and what we can do today, we couldn’t even dream about back then, but that was always the idea, and we always knew the technologies around computer vision, WIFI, and other things we can improve to a point where you can do more and more. From an actual business model, we have learned and evolved a lot because we started out as more of a traditional one-time software model, and we moved to a full-recurring SaaS model. Then we launched our own sensors and hardware that we launched a few years back. We’re now a full IoT company, and we actually have a subscription model including hardware and software as our main go-to-market for the last to years.
Alejandro: Obviously, 11 years is quite a ride. I’m sure that many things have changed now since the early days, but what were some of those early days like for you guys?
Alexei Agratchev: Many, many things have changed for sure. Eleven years is almost a real commitment. Early days were a lot of fun, so it’s a few of us who knew each other. Honestly, when we started, we were ultimately passionate about the idea, but we didn’t know if it would be successful or not, and it felt like we had very little to lose. As you go through, as you recruit a lot of people, and you get people to leave jobs, and if you raise money from both individuals, and funds, and other things, and people, and you raise a decent amount of capital, the level of responsibility becomes very, very different. But to me, every stage has been very different. The early days were all about—we were a bit ahead of our time. We were doing something nobody’s done before. We felt like we could create a new industry. It was very exciting, but it was also extremely—retail is a difficult place to introduce new things. So, the focus was all about to get somebody to believe in you and to find a customer or two that are going to believe in you. We were more fortunate than normal people I think with initial fundraising. So, we had funding which was from a few individual people, individual investors that were—if you ask them for sure more investing in us than the idea. That was critical because what happened in 2008, 2009, no venture person was going to invest in an analytics company that involved physical hardware for brick-and-mortar retail. That was the last area any institutional investor in Silicon Valley or anywhere else at that time was going to invest. We had initial funding and if you imagine it was 2008, 2009. If you remember, retailers were going out of business, shutting down, closing stores. The world was coming to an end. That was the time when we were talking to our first few potential customers when they’re dealing with all those things saying, “Hey, we have this cool technology that’s going to help you do things.” I think in many ways, it forced us to be super thoughtful about the value of the product because nobody was going to waste time unless they felt it was a matter of survival for them. But it was difficult times to start.
Alejandro: You were talking about funding. How much capital have you guys raised so far?
Alexei Agratchev: We raised about 200 million dollars total over the years, mostly equity and some debt more recently. Yeah, about 200 million dollars, so it’s a fairly significant amount of money that went into the business.
Alejandro: Yeah, and I’ve seen that you’ve gone from seed all the way to your last round that was announced. That was the Series E which is your most recent one. Can you walk us through the journey of really going from seed to Series E, and perhaps some of the expectations that you were encountering from investors?
Alexei Agratchev: Yeah, I’m happy to do that. By the way, I’ve never raised money for anything before this company, so it was a learning. As I mentioned when we started, we raised about 2 million dollars pretty quickly from a small group of individual investors. One of them put in a million. A few of us put in kind of friends and family. We got up to 2 million dollars. Then the same investors put in another 4 as we needed it on slightly better terms. So, we had about 6 million dollars—I guess that’s a big seed, but called an angel seed before we did our first venture round. Those investors have been with us since then. They’re the largest individual investor, I think, put in about 9 million dollars of his own money to participate in different rounds. They’ve been supporters of the business, but we had that 6 million dollars to build the initial business. That got us to a point where we had customers. We had revenue. We had some great case studies. We had certain proof points; definite proof points that technology worked and solved the real problem. But we were still I would say just under 2 million dollars in revenue, but it looked like it was just about to take off. That’s when we went and started raising our initial—went and looked at raising our initial venture round. It was very, very difficult. That was the end of 2010, beginning of 2011. 2011 is when we closed our first venture round. The first venture round, even though it looked like the company was starting to go from 2 to 4 million, it looked like we had some amazing customers that it looked like we were going to start really scaling. It was very, very difficult. I probably talked to 30, 40 different venture groups. The metrics looked good, and they were looking better and better, but there was a set of—one is people just didn’t like retail. Everybody thought and said, “Retails don’t spend money on technology. You can’t make money in retail.” Which to me, it’s a multi-trillion-dollar industry that obviously has to transform and technology is going to play a role in it. It is a ridiculous way to look at it, but at the same time, you look at the investors, and they had no examples of successful venture exits doing retail technology, and it’s hard to get excited. So, a lot of people just said, “We don’t invest in retail. We deal in physical hardware. People liked something where you can press a button and get to 100 million dollars of revenue while for us, you have to physically deploy stores which the issue was with products where you can—with companies where you can press a button and get 100 million dollars. Somebody else can press a button, and you can lose that 100 million dollars. Our revenue was very sticky, but it was tough. It took over six months, and finally, we did find August Capital which was a great fund, and then they did a first venture round. In the end, it was a great round on good terms, but it took over six months and real pain to get there. Then with that round, actually, we started scaling quite a bit and growing really well. All the sudden it started scaling exponentially. The revenues were growing, and everything was looking good. It was emerging as a real category, and we certainly were a clear leader in it, and I was creating it. The first round was 8 million dollars after that first venture round after the 6 million of private money. We went to raise a new round, which we were looking to raise about 15 million. It was easier. At that time, we could get conversations. Everybody wanted to talk to us. We could get term sheets, but it was still quite a bit of work to get to the evaluation we wanted. Eventually, we did close the round with a firm out of New York that led that. Then all of the sudden, a few things happened. Big data became a big thing, and we were clearly a big data company. A company like Splunk went public and made a lot of money for people. Commerce was something that people said, “Oh, commerce is being transformed, and there’s going to be lots of money to be made from being a technology-enabler of that transformation where when we had just started to think. We were thinking about going and raising 20 million dollars for our next round. All the sudden, before I could even finalize a deck and start doing presentations, we had four term sheets. We had all these other people wanted to participate. We had 80 million dollars that people wanted to put into the company. I remember we actually raised the round to 30. Cut it off. Took the investors we wanted, and closed the round. It was so easy compared to what happened before while the business fundamentally was the same. Yeah, it was growing. It was significantly bigger, but it was fundamentally the same business that rests on the same needs. Then we closed that round, and we also brought in some great strategic investors besides financial like American Express, CloudCom. Later, we added some investors in Asia to help us with our global expansion. The round after that was a proactive round by one of the investors that participated, came in and led a really big round with quite a bit of capital. In honesty looking back at it, we raised too much money at a too high evaluation too fast. It worked out, but it in some ways created its own problems because no matter what you say, no matter how you tell yourself, we were so frugal the way we optimized, the way we grew. We were so scrappy, and we were able to grow. We told ourselves, “Yeah, we now have all this money in the bank.” We had 10s and 10s of millions of dollars of money in the bank. We were still going to run it in the same frugal way. No matter what you tell yourself, you don’t. When you have that money, you just start making decisions differently. It actually is very difficult to build a good company that way. At some point, you have to step back and really try to optimize.
Alejandro: Got it. You were talking about strategics here. Just like you were saying, CloudCom, American Express, all these guys became part of your cap table. Now that you have the experience with VCs and then also perhaps the corporate venture arms of these larger corporations, what is the difference that you have encountered between the traditional VC and the corporate VC?
Alexei Agratchev: There are a couple of things. By the way, where the corporate VC can be a challenge is if they invest with the idea of an acquisition and it doesn’t work out. I’ve seen that. It can become a challenge. For us, folks like American Express and CloudCom as an example have been unbelievable partners where both of them enabled us to do things we couldn’t do on our own. There’s been no very helpful open doors. CloudCom helped us. Without CloudCom we would not have been able to develop our own hardware as efficiently. In fact, I’m not sure we would be able to do it at all. They helped us get it done. I would say they’ve been amazing investors, and the fact that they don’t have the fundraising pressure of raising funds is actually in some ways is much more patient and long-term. It’s less emotional about the different ups and downs of the business. If strategics invest with a specific agenda and that agenda doesn’t work out, that can be a real problem. We’ve had a little bit of that with some of the other parties. So, I think it’s important to understand what’s driving the investment and how it’s going to be managed, and also, who’s running it. American Express—the initial strategic partnership that drove the investment didn’t really work out, but then other things came out of that that have been very successful. That’s also how they do, but it is definitely possible to be a problem. The bank share investors are not all the same. The challenge was venture investments for companies that are long-term companies is that sooner or later, I believe if you raise venture money, and you are running the company for over five or six years from your venture round, sooner or later there’s going to be a moment where, at least one or two of them, where your interest might diverge because of their fund cycles, and fundraising, and other pressure, and where if your interests are completely aligned, then there’s no issue. But sooner or later, there is going to be a point where your interests and your actual motivations are going to diverge. That’s where it can get really difficult. Again, that’s where I think who the partners are and the relationships you have are super important, but that dynamic of fundraising and the internal part of politics in different venture firms and what’s important for them to show in terms of markups, and other things that may actually be completely irrelevant to the long-term success of the business. That’s a real challenge. If you raise some money and two or three years later everything is up and to the right, and you’re selling to everybody and make some money, you never are into those challenges. But if you’re doing it over a period of time, even if things are going well, sooner or later there’s going to be some problems in terms of what’s driving you at the time.
Alejandro: Yeah, and we’ve seen that. We’ve seen that with cases like Google investing in Uber, and then all types of issues with them trying to do it on their own, but anyway, that’s a different story. I think that what you’re touching on here, having a clear alignment and making sure the agendas are aligning makes complete sense. Talking about transactions here, Alexei, you guys have done two acquisitions on the buy side that have been reported. I wanted to ask you what have you learned because almost every acquisition fails. It’s unbelievable. I think it’s all about integration. So, I want to ask you, what have you learned about integrations?
Alexei Agratchev: By the way, just to be clear, we would have not been able to build this business without some of the venture investors and the advice they provided to us and help us, actually customers opening doors, hiring people, thinking through, and especially things like acquisitions. One of our investors was so instrumental in helping us think through and negotiate that, so there’s real value in venture investors as well, it’s just that you have to be a—those challenges go on. We did two acquisitions, both small, private, private-to-private deals which initially everybody told me the private-to-private deals always fail. In this case, I would say both of them—the first one, I would say was very successful, but we did have a partnership, a startup that was related technology. We worked with them on a partnership. I got to know the CEO really well. We got to know the teams. We talked to some customers together. We started working on product integration, going to market together. So, we got to know each other fairly well. In this case, I knew they were going out to fundraise. I actually introduced the CEO to some venture guys that I knew. Then a couple of people suggested a couple extra venture guys that talked to them told me, “The company looks interesting on its own. It’s a little difficult because of the scale, and they have just this one set of functionalities, but combined with you guys, it looks really, really interesting.” So, I went into the CEO, and I said, “What do you think about trying to get a deal done?” He liked the idea, so we started working on that. The negotiations were a challenge because of all the different people involved. Also, on their side, they had some investors that had a bunch of ideas about what needed to be done, and again it’s private-to-private. It was a 100% stock deal. Then on our side, if there’s one area where all financial investors have an opinion, it’s how a deal should be structured and done. So, there’s definitely a lot of people around the table with ideas. But at the end of the day, we got a deal done that I think everybody was happy. Looking back at that deal, it was absolutely successful. The CEO stayed with us for four or five years as a head of sales and helped grow the business. Their head of engineering actually started managing most of our engineering for the last five years. The head of product now actually runs all the product for us. A bunch of their engineers had been key as we transformed the company to a SaaS model and moved to a new cloud and architecture. The product, itself, was something that we were able to generate quite a bit of revenue from, and integrate, and leverage a lot of their technology. So, I think in every way, that deal was a success, but I think it was because it was a small team. We got to know them well. I think it worked out really well. The second deal was similar in a way. We got to know the team. They were not in the Bay area. They were in Chicago, and it was a slightly more—the product was not quite as easy to integrate, but we felt it was very strategic. What happens in retail is there are companies that have some really interesting technology and scaling the channel, and the go-to-market is very difficult. It took us years and lots of attention, but we figured out how to sell stuff to retailers. We could take a product that was very small, and I think we almost quadrupled the revenue in two years of that second deal. By bringing it into our channel and our sales. It was not as successful in terms of leadership and technologies and integrating the teams, but financially, it was definitely successful if you look at what we paid for the deal and what it ended up generating. In terms of revenue and cash, it was an extreme success. Both were a similar thing where it was a company we knew. We got to know the founder. We introduced him to some customers. We pitched together to a few customers. We got to know them before we tried to do the deal. They are distracting though. Even small deals when you deal with people you know well take up a lot of energy and a lot of effort. Integration, I think we did a pretty good job, but integration also takes up a lot of effort and a lot of energy. We’re not a company that had a M&A integration machine. So, all of us had to do it.
Alejandro: Got it. Talking about teams because you were touching on that earlier with some of the integration of your acquisitions, how big is your team now?
Alexei Agratchev: Our team is a little over 200 people, so it’s actually working. We have offices in 10 countries, and we have deployments in 83 countries. We have a lot of subcontractors that do the physical deployments. The interesting thing about the team, actually if you look at it, for a while, we were doubling, tripling all the time. I remember when we went from about 20 to 100 people really, really fast. We hit this crazy growth spurt, and we were just hiring and throwing people at things because we felt like we needed to do it. I remember when we were 20 people, it felt like we were 20 people doing the work of 50 people. Everybody was doing multiple jobs. Everybody was working really hard and producing a lot. Then all the sudden, we’re 100 people, and it felt like we were 100 people doing the work of 50 people. So, you have five times the payroll and the same output. Then it takes a while. You’ve got to slow down and get to a point where you feel like you have 100 people doing the work of 100 people before you grow. Then we went from 20 to 200 really quick. All of us, two and a half years we’ve actually been at a fairly stable headcount. We grew a little bit while the revenues have been growing really, really fast and the margin has been expanding because we definitely overinvested, and then we’ve been realizing I think we’ve been much more focused on a kind of operating leverage and investing in systems and processes and things like that. That’s been really, really good and I wish actually that we had done that earlier because as I mentioned, the problem is when you raise a lot of capital, you don’t make optimization decisions the same way, and you feel like “we’re overwhelmed here. We need help. Let’s hire a person.” Well, you hire people to do jobs that shouldn’t exist because you should have improved your processes and automation that those types of things. Then you look back and all the sudden you have a company that just doesn’t feel nearly as efficient as it should be.
Alejandro: Yeah, and obviously, we’re talking about eight years of experience here, and in 11 years of experience, I guess the landscape has changed quite a bit. Now, we have Amazon and things like that that have really taken up as well. I want to ask you, where do you see retail heading in the next five to ten years?
Alexei Agratchev: It’s been fascinating what’s happening in the retail market. By the say, things like Amazon acquiring Whole Foods and what Alibaba’s intends on doing with physical retail acquisitions in China has been one of the best things for us because it’s been so motivating. All the sudden, you have—and Amazon did this. They did the Amazon Go cashier checkout which is a different use case, but it’s all about sensors, IoT, and computer vision, and they acquired Whole Foods, and then people started talking about, “Amazon is going to acquire Kohl’s or someone else, and they’re going to put in all these sensors. They’re going to use analytical expertise, and they’re going to kill everybody.” Whether it’s hysterical or not, it’s been very motivating for people to start doing things like what we provide, and it’s hard for retails to do on their own. Here’s the interesting thing about retail the last few years. E-commerce came out, became this hot thing, and hundreds and hundreds of millions of dollars have been put into a bunch of different brands, and a lot of that money did not generate a good return because what happened is in a lot of categories, e-commerce is very difficult to run profitably. If you look at things like apparel, shoes, and accessories, the variable costs of running a pure eCom business make it almost impossible for a lot of categories to make any money. When I say variable costs, the expectations that are set by companies like Amazon and Zappos and other around returns and shipping and delivery is unsustainable. They’re very expensive. The other one that’s even more important in some ways is customer acquisition. Acquiring customers online is very expensive, and none of those costs go down with scale. In fact, the customer acquisition cost has been going up. So, the cost of a Facebook ad is 10x what it was seven or eight years ago, and it’s going up at least 10% every year. For you as a brand, acquiring new customers becomes incrementally more expensive as you scale. People realize that while brick and mortar—yeah, we’re overstored. We have too many malls in the U.S. If you have a decent brand that’s relevant and you open a store in a good location, and you do a good job with the store, it actually becomes your best customer acquisition vehicle. While you have some upfront fixed costs, it’s actually much easier to generate a profit in a store than online for a lot of categories. You have to have both. You have to have online and a store. That’s why you see all these direct-to-consumer brands opening stores. The other thing that happened is the multi-brand retail became in most categories a lot less relevant. I think beauty, people like Sofort and ALLTEST really good retailers and very, very relevant, but you look at a lot of multi-brand retail and apparel for example. If you were a new shirt company or a new shoe company, a brand that was starting up ten years ago, the first thing you would try to do is get a deal done with Nordstrom or whoever is the right multi-brand retailer for you. Today, all these guys are starting out as direct-to-consumer online, and then they run into some scaling issues, and they start opening stores, and they’re scaling as direct-to-consumer retailers. That’s a big, big change and it’s impacting how it works. By the way, if you are a direct-to-consumer brand that owns a category and knows a category well, competing with someone like Amazon is much easier than if you are trying to do a lot of different things. And they are very focused on if you look at the way they’re opening stores. They’re creating different experiences. They’re doing things differently. They’re trying to build communities around their products. A lot of them are doing extremely well. Now, there are still a lot of retailers out there that will go out of business, but it’s not retail. The brands are stale. The relationship with consumers is not there. The stores haven’t been updated. They should go out of business. But retail is a category I should think is thriving in many ways. If you look, it’s thriving globally. It’s a multi-trillion-dollar industry. There’s no question that stores will play a big role because online almost anything you do—if you have a product that everybody wants and no one can buy anywhere else, for a while, it doesn’t matter what you do. That’s amazing. When you look at some of the new brands that are just growing like crazy because they’re a really hot product, and people buy it, but outside of that, the only things you can do online to truly differentiate yourself are generate unique content and build a community, which if you are very—when I say niche, I don’t mean it as it has to be small. There are some big niches, but if you are focused on an aspect of like pet lovers or a certain aspect of beauty, and you can create this content that people really like, and you can build a community on that, that can be sustainable. Outside of that, anything you can do on your website, people can replicate, and you can’t differentiate yourself. Stores are difficult to execute well, but if you create a good experience and you execute well, it becomes a sustainable differentiator that people remember, and that’s the way to differentiate your brand. That I think is going to become more important and not less important.
Alejandro: I think that experience, as you say, is definitely key. I think all of these spaces now that are becoming empty, I see them in New York City. Really, the ones that are thriving, the experiences and how they’re able to capture and bring, and really create that loyalty with customers is what you are alluding to, I very much agree with. Let me ask you this, Alexei, because you, just like any other guest, I always like to ask this question. If you could go to the past and give yourself advice before launching a business, what would that be and why?
Alexei Agratchev: Honestly, I think for me, I would have focused much earlier on profitability than we did. There are a million different things about hiring people and the kind of people, you want to hire different things, and become an internationalist early, and all the kind of more huge lessons like how you build your sales team, and huge lessons around each one of those. But if I look at it fundamentally, for me, I think if you focus on profitability earlier, which is not really the venture way here, you end up building a better business. We focused on that later, and I think that improved, but you’ll build a much better business if you focus on it earlier, and certainly, that’s what I would have liked to do differently.
Alejandro: Got it. What is the best way for folks that are listening to reach out and say hi, Alexiei?
Alexei Agratchev: They can ping me over LinkedIn probably is the easiest. Just let me know what they want to talk about. That’s definitely the easiest.
Alejandro: Fantastic. Well, Alexie, it has been a pleasure to have you on the DealMakers Show today. Thank you so much.
Alexei Agratchev: Hey, same here. Thank you very much for having me. You have a great day.